Demonetisation: In brief, what government planned and how it differed on the ground

Demonetisation: In brief, what government planned and how it differed on the ground

hese are being raised after the Reserve Bank of India (RBI) announced that 99 percent of banned notes of the Rs 1,000 and Rs 500 denomination are with the central bank. Some are even asking if the plan could harm the economy in the short to medium term.

PM Modi led government had thought that by banning the old notes the government would be able to hit the hoard of black money in the country. (IE)

Questions are being raised about the economic rationale and the success of the demonetisation drive announced by Prime Minister Narendra Modi on November 8 last year. These are being raised after the Reserve Bank of India (RBI) announced that 99 percent of banned notes of the Rs 1,000 and Rs 500 denomination are with the central bank. Some are even asking if the plan could harm the economy in the short to medium term. The PM Modi led government had thought that by banning the old notes the government would be able to hit the hoard of black money in the country. Even PM Narendra Modi had said that the move would isolate those who are dishonest, according to an Indian Express report.

The Central government was expecting that notes worth Rs 4 lakh crore would not return to the Reserve Bank. With the return of 98.96 percent of the banned notes in the system that argument does not hold water. This also means that unaccounted wealth could be held in the form of real estate and gold, according to IE.

Digital transactions
Although the government had not initially stated that promoting digital transactions was a part of demonetisation, it later said that one of the aims of the government was to promote digital spending. The government said that the aim was to move from a cash-based economy towards an economy which is based on electronic spending. This was supposed to encourage spending through prepaid wallets, debit and credit cards, NEFT (National Electronic Fund Transfer) and the Bhim App.

There was a surge in electronic spending in November and December of last year, with 671.49 million transactions in November and 957.50 million in December. The number of electronic transactions declined later as more cash became available and the lack of e-spending infrastructure began to tell, as per the report.

Cash in circulation

The Finance Minister has said that the quantum of cash in the system has come down. RBI’s data shows an 11.79 percent decrease of cash in the system from June 2016 to July 2017 or a change of Rs Rs 17.07 lakh crore in June 2016 to Rs.15.06 lakh crore in June 2017. The RBI has also spent Rs 7,965 crore to print new currency notes from July 2016 to June 2017, more than double of what it had spent in the previous two years. If this trend becomes permanent then this could bring a paradigm shift in the economy, as per the report.Anonymity of cash owners

The government had stated that an anonymity, which came with cash ownership has ended. the government now claims that it has details of those who deposited cash during demonetisation. The Income-Tax Department tracked 13.33 lakh accounts which had total account deposits worth Rs 2.89 crore, over 9 lakh account holders have responded to the queries of the I-T Department.

Tax base

Another stated aim of the demonetisation drive was to increase the tax base. This move has paid dividends as personal income-tax returns have gone up by over 25 percent, although there hasn’t been a huge rise in the number of people who have filed returns. The rise is attributed to people who were compelled to deposit cash in the banks due to demonetisation.

Mutual funds
The Centre stated that savings in the form of investment in mutual funds, life insurance premiums and other products have gone up post demonetisation, assets under the management of mutual funds had grown by 54% by June-end 2017 from March 2016.

RBI payout
The RBI transferred a surplus of only Rs 30,659 crore this year to the government, down from the Rs 65,876 crore transferred to the government last year. These transfers gave a huge boost to the government as non-tax revenue receipts helped to bridge fiscal deficit. The lower payout to the government by the RBNI this year was due to printing costs RBI transferred Rs 13,140 crore to its Contingency Fund and unlike the last three years, this year there was hardly any bolstering of the reserve.